Spotify: Redefining the music industry?

The music streaming service Spotify celebrates its fifth birthday this month. Therefore, we think it’s time for us to take a closer look at the service that redefined a whole industry and could be the start of a new way of completely cloud-based media consumption.

Spotify was founded and launched by Daniel Ek and Martin Lorentzon in 2008. The goal of Spotify was to establish a business model for the music industry that would benefit users and musicians alike, while stopping the growth of illegal downloads.

Therefore, Spotify created two business models for users: a free version that gives users full access to its vast music library (over 20 million songs) but is also frequently interrupted by advertisement, and a paid version (usually charging a subscription of around 10 € per month), which removes all advertisement and gives users the possibility to listen to music even if they are offline.

Today, Spotify is available in 28 countries and has 24 million users worldwide, including 6 million paid subscribers. However, what role could Spotify play in the future for musicians, users and advertisers?

Spotify in the music industry – Who really benefits?

With the launch of iTunes in 2001 and the success of the iPod, the transition from physical records to digital files was completed. However, sadly alongside this transition came an increase in illegal downloads and an emerging crisis in the music industry.

Spotify is often seen as one of the saviors of the music industry because of the fact that, since its launch, the number of illegal music downloads has declined instead of constantly increasing. This is also the main reason why many major music labels supported the streaming concept of Spotify and opted to join the service in a relatively short period of time.

In addition, most of the major labels nowadays are more than willing to cooperate with Spotify because they can take home about 70% of Spotify’s income as rights holders. Even though the profit that comes through Spotify cannot be measured against profit made from retail sales, it’s still far better than losing more income to piracy.

Because Spotify is focused on discovering new music and sharing playlists on social networks, it also benefits minor musicians and bands, ones that otherwise wouldn’t be recognized in older business models such as iTunes, which mainly promotes artists based on sold units.

Nevertheless, many musicians and bands are highly critical of music streaming services. They claim that their income has not improved compared to earlier business models and that their labels are the ones profiting. Plus, there are only vague figures available which shed light on how much money returns to rights holders vs. musicians. However, being a part of a huge collection of music often comes with the sacrifice of individuality and unique characteristics. Especially for older artists, this is an understandable problem, especially when an artist is used to a market based on sold units, fame and their fan base (e.g. AC/DC still withholds their participation from any streaming services).

But in the end, music labels and artists have to align with their fans, as they are the ones who will decide if services like Spotify will survive or not.

Spotify for users – Only look, don’t touch!

The success of Spotify actually resulted from a pretty simple approach. It is essentially a web radio, which lets users decide what music they want to hear.

By offering a completely free version, Spotify soon found a lot of advocates. Then, the paid version launched and offered to remove all those pesky adverts, as well as allowed users to download music and listen to it while offline. This fact alongside the service’s accessibility (Spotify also works via a web application in most browsers) also turned 25 % of its users into paying subscribers.

But why are 75 % of users still not willing to pay for this service? There are various reasons for this. Even though Spotify was able to convince some users to choose their service over illegal downloads, there is still a huge amount of piracy, especially when it comes to the music industry. Furthermore, Spotify does not allow you to store music in a traditional sense. While paid users can download music, downloads can only be used within the Spotify app and there are no mp3 files stored anywhere else. Meaning, if the subscription/account ends (or Spotify shuts down completely) all playlists and stored music would be gone for good. The user is only buying access to the music, not ownership of it.

Nevertheless, streaming services break up outdated price models for media consumption and most people endorse this concept. And since many users are willing to consume free media even if it comes with advertisement, let’s have a look at how Spotify campaigns can benefit brands.

Spotify for advertisers – Making the right use out of music

With almost 18 million people using the free version of Spotify, there is a huge potential target group available to advertisers.

There are of course a lot of opportunities for advertisers to combine audio spots and display banners in an exciting way. Through these, brands can benefit from reaching consumers both audibly and visually.

The most interesting part of the advertising opportunities offered by Spotify is the integration with its music and playlists. Spotify also offers a playlist analyzer function, which checks the user’s music and then generates an individual result. A brand can also choose to complement a playlist by attaching certain songs to a campaign. While music is a strong factor in conveying emotions, an extensive and creative campaign idea for Spotify has the potential to result in huge engagement, interaction and brand awareness all at once.

The downside is that advertisers cannot address their messaging to paying Spotify customers, which is probably the most valuable target group of them all.

So where is Spotify heading in the next five years? Like it’s often said, imitation is the highest form of flattery. The big players of technology Apple (iTunes Radio), Google (Google Music All Access) and Microsoft (Xbox Music) have all released their own versions of a music streaming service over the past 12 months. Spotify have already proved that their business model is a success, however now they have to prove that they can compete with the rising number of competitors as well.